This has been an interesting topic as of late. I’ve seen articles and questions roaming around asking, ‘if you’re wealthy, shouldn’t you just pay off your mortgage?’ and such… but is it always a good idea to pay off your mortgage as fast as possible or should you leverage your home as long as you can?
The theory of paying off your mortgage and ‘home debt’ sounds like a great plan, right? But there are many reasons why you may not want to do so.
Many wealthy people make their money work for them and this means figuring out the cost of paying the mortgage off, making extra payments or just making the minimum payment. If you borrow money at a low rate but invest for an even higher rate, you should not pay back that low rate money but instead, leverage that money in order to pursue higher gains. [source]
If the mortgage annual percentage rate is less than the annual percentage yield (how much money you earn on a deposit over a year) on an investment instrument, then you should opt for the mortgage instead and invest cash.
If you borrow money at 4% for a home loan and let’s say make $2,000 mortgage payments a month, that’s $24,000 a year borrowed at 4%. If you took that same money and invested it in the stock market with an annualized return of ~10% the difference is 6%. This means you’d be making 6% extra per year just by not paying off the mortgage entirely. This is just an example as other variables come into play such as taxes, compounded interest etc.. but it’s this comparison that homeowners have to weight in order to decide what makes better financial sense.
[Read More: My Husband Won’t Give Me Money for the Mortgage]
Another reason you may not want to pay off your mortgage is the protection of assets against lawsuits. If the bank has the first mortgage on a property and your equity is low, it can be very difficult for claimants to pursue your property. “The costs and loss of value in a forced sale of a property act as a virtual shield to protect the home from lawsuits”. If the property is paid off completely, it’s a sitting duck for those laying claim to it.
Other reasons include offsetting your tax debt as interest paid on a primary residential mortgage can be deducted. Tax purposes can play a big role in whether or not your house is completely paid off.
It’s important to look at all factors when deciding whether to pay off your mortgage or not. Can you invest that money in a better fund? What does your financial situation look like and at what stage of life are you in to minimize risk? Are you planning on staying in the home long-term? All these questions should be thoroughly discussed and pondered. It may or MAY NOT be beneficial in the long run for your situation.
Have questions about this or other mortgage details? Maybe thinking about lowering your terms to 10 or 15 years? Call me today for the best rates and terms for your needs.